When a person files for bankruptcy under Chapter 13 of the Bankruptcy Code, the person's goal is to have the opportunity to repay some or all of his debts, under better terms (e.g., with lower or no interest). Unlike a Chapter 7 bankruptcy, Chapter 13 allows the debtor to use whatever income he may have in the future to pay off creditors. A Chapter 13 bankruptcy is particularly applicable for a debtor who has a regular income. In a typical Chapter 13 bankruptcy proceeding, the United States Bankruptcy Code gives the debtor 5 years to pay creditors back.
In a Chapter 13 bankruptcy proceeding, the entire process is carried out under the supervision of the courts, with the aid of a Chapter 13 Trustee. While a debtor is allowed to keep all exempt property, the court approves a new proposed plan for repayment. A written plan is created giving details of all the transactions that will occur, and the duration of the same. The repayment must begin within thirty to forty-five days after the case was filed.
One advantage of a Chapter 13 proceeding is that unsecured creditors may receive payment on debts ordinarily discharged without payment in a Chapter 7 proceeding. For example, if a debtor manages to complete all necessary payments in a Chapter 13 plan, he is given a full plan discharge. Yet another advantage of filing for Chapter 13 bankruptcy is that a repayment plan can be created for the debtor even if creditors disagree with it, as long as it is approved by the Court. Although, creditors may file an objection to the plan, in case they have any.
In the Chapter 13 proceeding, there are different types of creditors. They include secured creditors, priority creditors, and unsecured creditors. A secured creditor has a secured claim against the debtor. A “secured claim” is a claim that is secured by a lien in the debtor's property by reason of the debtor's agreement or an involuntary lien such as a judgment or tax lien. The creditor's claim may be divided into a secured claim, to the extent of the value of the collateral, and an unsecured claim equal to the remainder of the total debt. Generally, a secured claim must be perfected under applicable state law to be treated as a secured claim in the bankruptcy. Certain debts, such as unpaid wages, spousal or child support, and taxes are elevated in the payment hierarchy under the Code. These are “priority claims”. Priority claims must be paid in full before general unsecured claims are paid. An unsecured creditor has an “unsecured claim” against the debtor. A claim or debt is unsecured if there is no collateral that is security for the debt. Most consumer debts including credit card debts are unsecured.
In a Chapter 13 proceeding, the secured creditors are paid first. The priority creditors are paid next, and the unsecured creditors are paid last. Unsecured creditors such as credit card issuers may not see any debt payments until late in the Chapter 13 bankruptcy proceeding (e.g., after 36 months), and they will typically receive only a fraction of the original debt owed to them. In addition, sometimes, the Chapter 13 debtors may become unemployed during the Chapter 13 proceeding so there is always some risk that the unsecured debtors will receive less than what is anticipated during the Chapter 13 proceeding.
For these reasons, unsecured debt is sometimes sold by unsecured creditors to debt buyers. The debt buyers may purchase the unsecured debt from unsecured creditors for some reduced amount. Traditionally, debt buyers have estimated the value of unsecured debt based on their past experience buying debt. On the other hand, sellers of unsecured debt may not have the expertise or experience to value unsecured debt, and may inadvertently sell the debt for less than what is worth. Accordingly, there is a need to help sellers (or even buyers) assign a present value to unsecured debt.
Embodiments of the invention address these and other problems individually and collectively.